Foreign Real Estate Israel Investment Guide

Background

Over the past year the commercial real
estate market has begun to reawaken and
the significant number of transactions
leave one with the feeling that
reference is not to a momentary
phenomenon but rather to a real change
in trend, which heralds the coming of a
new period in the window of
opportunities for executing transactions
at attractive prices and with handsome
returns.

Why should foreign residents invest in
Israel?

When examining any type of investment
and real estate in particular, one
should check the essence and quality of
the transaction on the one hand and the
alternatives at the investors’ disposal
on the other hand. The commercial real
estate market in Israel, which suffered
serious setbacks over the past 10 years
of recession, has only began to reawaken
over the past year. This phenomenon
opens the window of investment
opportunities to foreign investors, as
real estate prices have not yet reached
a peak.
For illustration purposes, if we are
refer to a productive real estate
transaction in the United States of
America with AAA tenants, the returns
that can be expected for the transaction
stand at approx.5% - 7% in the event
that the transaction was successful. In
Israel, however a productive real estate
transaction with AAA tenants would yield
average returns of 7.5% - 10%.
It should also be noted that the prices
at which properties are sold and the
returns that are calculated in relation
to the transactions have been determined
according to “dated” leases that do not
yet reflect the awakening that has taken
place in the branch. Id est, there is
further potential for profits latent in
each transaction as a result of the
improvement in the value of the real
estate and increases in the value of
leases in the future.

Executing real estate transactions and
productive real estate transactions
particular is, for the most part, a
financial transaction. We have often
read that because of unsuitable loan
conditions transactions do not
eventuate, as the profitability of a
transaction often relies on the
financing ratio that the bank
authorizes, the interest-rate and
finally the method of repaying the loan
which leads to examining the flow of
cash that remains in the hands of the
investor.. What is required and how is
the financing ratio for foreign
residents interested in acquiring real
estate in Israel determined?

A financial affidavit
- Because of the fact that foreign
residents do not have a permanent
income in the State of Israel, they
are obligated to furnish a financial
affidavit signed by an authority in
their country of permanent
residence. In the absence of this
financial affidavit, it would be
impossible to raise a loan. It is
important to remember that the
financial affidavit is used as a
yardstick for determining the
financing ratio to which the
borrower would be entitled.

Personal guarantees
-The vast majority of loans granted
in Israel require personal
guarantees. In contrast to the
acceptable procedure abroad, the
banks are not prepared to grant
loans against a pledge on the
property.

The financing ratio
- the financing ratio is determined
according to a number of major
parameters. Firstly, an appraiser’s
evaluation: Any loan acceptable to
the bank will be determined subject
to an appraisal received by the bank
from a real estate appraiser. The
financing ratio that the investor
receives is derived from the
appraiser's assessment and not from
the price of the property. Secondly,
the nature of the investment: in a
productive transaction the financing
ratio would be affected by the
quality of the tenant and could
reach a level of 85% financing. In
venture transactions, the financing
ratio could decrease significantly
to an average of 50%-60% financing.

Of course, the quality of the financial
affidavit assists in determining the
financing ratio to which the investor
would be entitled. Since any loan taken
requires a personal guarantee, the more
economically solid the investor the
greater the chances of receiving a
higher financing ratio.

The key to structuring a successful
transaction

Because of the fact that foreign
investors execute transactions at a
great distance from their places of
residence, they have to operate with
extreme caution and make sure that they
are working in pursuance of the
following keys factors:

A commercial environment
- Much time should be invested in an
in-depth research into the business
environment of the property for
investment. Care must be taken to
ensure that it has not been static
from an aspect of price and
percentage leasing in relation to
other properties in the area, as a
deviation of over 20% to what is
acceptable in the region should be a
warning light and why we were
entitled to such a premium should be
examined thoroughly.

Taxation programs
- foreign investors pay tax on their
profits according to the treaties
existing between their countries of
permanent residence and the State of
Israel. The key to building a sound
real estate transaction is
formulating a taxation plan
appropriate for the existing treaty
between the country in which you
reside and the State of Israel.
Proper tax planning could save many
tax payments and increase the
profitability rate.

Fiduciaries -
Prior to executing a transaction,
assistance by a qualified realtor or
attorney at law who specializes in
real estate etc. is vital, as they
are key factors in analyzing the
transaction. They know the market
and the existing trends and in most
cases act as your contact people in
the country.

A fiduciary assists both in analyzing
and formulating the transaction and most
important of all he/she takes care of
the property for you once you return to
your permanent country of residence.
A fiduciary should only be chosen after
a personal meeting or by the
recommendation of someone whom you know
personally. In any event it is extremely
important to ask him/her to furnish
additional recommendations in order to
get an impression from other bodies.